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Posts Tagged ‘FDI’

Yemeni banks cease some operation

July 14, 2011 1 comment

Growing tribal violence has pushed Yemenis to withdraw large amounts from banks that have crippled their ability to perform basic activities.

The withdrawals represent a bigger problem — tribal conflict is getting so dire that Yemenis are either fleeing the country with cash in hand or there is a real fear that whatever government comes to power could exert force over banks. With President Ali Abdullah Saleh in Saudi Arabia receiving medical treatment, there’s a sizable power vacuum that needs filling.  Saleh’s tribal allies already had turned against him. Yemen’s tribes are more than willing to vie for his former position atop the government.

This banking problem is more acute for the long term future than short term. Without any reserves, it cannot offer loans to businesses — and if it does, it risks default in an incredibly unstable economy. That means it cannot promote business in its own borders.

Additionally, it likely will not attract foreign investment (not that it was particularly successful in that regard before the Arab Spring) with financially tapped banks. The volatile political landscape will probably continue in Yemen much longer than any other Arab Spring nation, even after a new government comes to power. It appears some militant tribal faction will assume the presidency if Saleh steps down or is forcibly removed. Saleh has vowed to return to Yemen, which has made the country even more uneasy as Saleh will undoubtedly try to regain power from the tribes that now run the country. All of this sends bad signals to foreign investors.

Taiz is the city to watch. It’s considered the intellectu­al capital of Yemen, but it is growing increasing­ly militarize­d. People there never would have dreamed of seeing citizens carrying guns through the street, but it is now a daily occurrence­.

The longer Saleh stays in Saudi Arabia, the greater chance tribal violence breaks out in effort to establish control and supremacy over Yemen. I’m beginning to doubt that any change in government would lead to a peaceful, democratic one. Saleh certainly has not been a good leader — hardly anyone entrenched in power for 30+ years is — but there doesn’t appear to be a civil group ready to wrest power from the well establishe­d tribes.

From Al Bawaba:

Aeriqi confirms that banks suffering from large withdrawals may collapse and notes that liquidity is scarce. Dozens of banks are carrying out measures to ease monetary withdrawals such as reducing official working hours and initiating electricity interruptions.

Economic experts note the current crisis in Yemen has greatly impacted the Yemeni economy, especially the banking organizations which provide loans and credit to organizations and individual borrowers in order to meet their financial needs.

New IMF chief good news for Arab world

New International Monetary Fund chief Christine Lagarde has promised to give emerging markets a greater role in the macroeconomic monitoring and emergency lending organization, a move that should be a positive for Arab countries.

The IMF lends money to ailing nations — mostly poor — based on a “Washington Consensus” of structural adjustment policies. The idea is that these SAPs will integrate nations into the global economy, which will boost employment, make goods cheaper and provide stability for those nations.

For nations with a poor regard for human rights, IMF’s conditions could possibly increase the income gap between the wealthy and poor. IMF conditions such as spending cuts in social services, massive public sector layoffs, wage freezes to attract foreign investment, weaken public sector rights, devaluing local currencies, abolish price controls on basic foodstuffs and promotion of export-oriented production all put pressure on nations’ poor.

In nations where human rights and democracy are not respected — like many in the Arab world — IMF loans have been widely abused. For example, since dictators ran many borrowing countries between 1972 and 1981, IMF loans were used to boost military spending from $2.5 billion to $29 billion. Developing nations turned to rapid industrialization, building airports and dams, rather than small-scale development projects to assist local economies.

The IMF, headquartered in Washington, D.C., has a “Western” economic philosophy of open trade, but open trade does not suit every nation. And given the recent financial troubles of interconnected, open economies in Europe and the United States, the timing could not be better for emerging market input.

The IMF applies its Washington Consensus because it believes that cocktail of macroeconomic reform will allow debtor nations to repay IMF loans faster. But I would argue this is a quick fix that provides a cosmetic spurt to GDP without actually creating a sustainable improvement of quality of life.

Many Arab nations — even a majority of those still engaged in the Arab Spring revolutions — are largely run by authoritarian figures that spend little on social services because there’s no political pressure, such as elections, to do so; rely on public sector employment because those figures build loyalty through those jobs; rely on military employment for loyalty; have undiversified economies; and institutionally-created income gaps through shoddy welfare systems and lack of homegrown business.

At the root of this problem is the lack of accountability for Arab leaders as a result of weak or nonexistent human rights. Without the threat of being voted out of office and with the military, business elite and public sector dependent on those rulers staying in power, there are few ways to force leaders to cycle the money they earn and keep for themselves back into the economy. As a result, most people remain poor, education becomes less attainable, those nations become less attractive for foreign investment to mine the talent living there and people do not have enough money to do things like become an entrepreneur.

India and China still have rampant income inequality and the latter has a suspect human rights record, but their economies are growing faster than anyone. They will undoubtedly have an increased influence in the Lagarde-led IMF. India built its economy through harnessing the loads of young talent it had at home, making it an attractive place for investment. China closed its economy, has manipulated currency and relied on its 2 billion residents to be its market.

Neither India or China should be a model for macroeconomic policies. Their input, however, could help craft a better model than what we have today.

 

 

 

US should reevaluate Iraq exit after oil attacks

June 28, 2011 1 comment

Recent reports that Iraqi insurgents are attacking the oil industry should give the US pause about its planned exit considering the impact these incidents could have on long term economic development.

Joel Wing at Musings on Iraq has a good summary (with links) to the reports. In all, there were five mishaps related to oil in June.

Wing explained that oil accounts for 90 percent of the nation’s revenue. He said insurgents plan such attacks to grab headlines, which leads to recruits, which leads to money, which leads to continued operations.

The constant threat of those attacks lead to unpredictability, and Wing hypothesized that insurgent timing was planned to coincide with the beginning of several foreign oil contracts.

This dynamic will have a tremendously negative effect on Iraq’s economic development potential. In his essay “International Investment and Colonial Control: A New Interpretation,” Jeffrey Frieden explained that site-specific foreign investment during a host country conflict is easier to defend with force — for example, oil fields. But there are some major security concerns ahead of the planned US exit from Iraq. The Iraqi police and army do not appear trustworthy or legitimate to many citizens, which means they cannot be counted on to provide vital security for the nation’s precious oil resources.

Whether this causes investor flight remains to be seen — although that’s doubtful considering every country has oil needs. But it could significantly alter the contracts Iraq receives. Maybe not monetarily, but something may have to give. What that is remains unclear, but one thing is certain — investors won’t like the prospect of their millions of dollars going ablaze.

The attacks on oil have another effect — by crippling the nation’s main breadwinner, the insurgents render the government ineffective. Depleted jobs numbers and oil revenue sends a bad signal to the Iraqi people that their government cannot provide for them. That in turn feeds into insurgent recruiting, as those groups are bankrolled by wealthy people and can offer essential services such as education, food and shelter.

In essence, the attacks on oil encourage civilian dependence on insurgent groups for general welfare. It’s a scenario the U.S. has tried to avoid for years, but one that may still be a factor when it leaves.

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